Advice on Consequences of Credit Card Default

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READER QUESTION

Please answer our four questions relating to credit card default and its consequences.

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Bills.com Resident Expert
Jan 01, 2012
HIGHLIGHTS
  • Review how an account moves to charge-off status.
  • Examine the debt collection process.
  • Understand ways you can rebuild your credit.
BILL'S ANSWER

I answer your four questions about the consequences of defaulting on a credit card debt below.

1. Charge-Off

As with most consumer debts, failing to make payments on your credit card accounts in a timely manner will likely result in the lenders reporting late payments to the major U.S. consumer credit reporting agencies — Experian, Equifax, and TransUnion. After receiving no payment for 6-8 months, the creditors will be required to “charge off” the debts, meaning that they must remove the debt from their “accounts receivable” books; a charge-off does not mean that you are not liable for the debt, only that the creditor. Charge-offs will appear as derogatory items on your credit reports, and will likely cause a significant reduction in your credit score. To read more about credit, credit scoring, and credit reports, I encourage you to visit the Bills.com at Credit Information & Resources page.

Collections

While the credit problems associated with financial hardship are an issue for consumers who are planning to make a large purchase in the near future, the more immediate consequence experienced by most consumers are the collection activities undertaken by many creditors. First, you will likely receive collection calls and letters from the creditor directly. If you are still unable to pay the debt after several months, the creditor is likely to refer the account to a third-party collection agency. Third-party collectors are known to be much more aggressive in their collection tactics than original creditors, so do not be surprised if the calls become more persistent, or even threatening. Thankfully, federal law, the Fair Debt Collections Practices Act, requires third-party debt collectors to stop calling you if you send a written demand to cease communication. You can find an example cease communication demand letter at the Bills.com Debt Do-it-yourself page.

Judgments

In some cases, when all other collection efforts fail, a creditor will decide to file a lawsuit against a consumer for his or her unpaid credit card account. In my experience, only a small percentage of delinquent accounts end up in litigation, but it is a possibility about which you should be aware. If one of your creditors sues you, the court will likely issue a judgment in the creditor’s favor. Depending on your state’s laws regarding the enforcement of judgments, the creditor may be able to garnish your wages, levy your bank accounts, or take other action to enforce its judgment. Most consumer debts do not result in litigation, so you should not be overly concerned, but if a creditor does file a lawsuit against you, you may need to consider establishing a repayment plan, or even filing for bankruptcy protection, to prevent further enforcement action.

2. Rebuilding Credit

If you decide to file for bankruptcy protection, the case will appear on your credit reports for ten years from the date of filing, and will likely cause significant damage to your credit rating, especially for the first few years after filing. As time passes, credit scoring models and most lenders give less weight to older derogatory items in favor of newer positive trade lines when reviewing a consumer’s credit history. You will need to establish some new credit lines so you can establish positive payment history to counterbalance the negative impact of your bankruptcy filing. Establishing a positive payment history can be difficult for people who have had past credit problems, especially those who have been forced to file for bankruptcy protection.

There are several options available that you may want to consider. First, if you know someone with an established credit history who will co-sign a loan with you, you may be able to obtain a loan and start building his own credit. If you cannot find someone to co-sign an unsecured loan with you, there is always the option of taking out a secured credit card. Secured credit cards require you to deposit cash in an account with the credit card bank. The credit line available on the card is equal to the amount of cash you have on deposit. This may sound strange; why would you not just spend your own cash? However, these secured credit cards report timely payments to the credit bureaus and may help you establish a credit history. To read more about bankruptcy, and the alternatives available to consumers, I encourage you to visit the Bills.com debt help page.

3. Credit Score Impact

In terms of your credit score, it would probably be better to have a single large account which you are unable to repay rather than having multiple delinquent accounts. Although the large account would be more heavily weighted, a single delinquent account is preferable to numerous small delinquencies. As for debt consolidation, debt management, or debt settlement, generally the opposite would be true — the more accounts you have, the more flexibility the debt servicing company would have in negotiating with your creditors. If you have only one account, if the creditor is unwilling to negotiate, the whole plan is bust; however, if you have multiple creditors, one or two creditors’ refusal to cooperate will not defeat the plan as a whole.

4. Bankruptcy

Both types of bankruptcy (Chapter 7 and Chapter 13), as well as foreclosure actions, are viewed as serious derogatory items on consumer credit histories. I cannot say that one is “worse” than the other, as each has its own serious consequences. However, I can tell you that a foreclosure action is often more costly for consumers; in addition, many consumers find that they must file for bankruptcy after foreclosure to prevent further collection action by their mortgage lender.

If you face foreclosure and/or considering filing for bankruptcy protection, I strongly encourage you to consult with an attorney in your area to discuss your financial difficulties. Your attorney will review the details of your situation and help you decide what actions are appropriate for you and your family.

I wish you the best of luck in resolving the financial problems you are facing.

I hope this information helps you Find. Learn & Save.

Best,

Bill

Bills.com

Comments (153)


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Luis L.
Sunnyvale, CA  |  January 01, 2012
I'm 59 and unemployed one year now and receiving unemployment benefits, part of which have been used to pay credit card debt for which I've never been late. I have eight credit cards in my personal name. Two have no balance, two I pay off the entire balance monthly (groceries, gas, etc), and the remaining four have a combined debt of $80k. I'm delinquent on my home mortgage since losing my job, and am in the final stage of a short sale closing. My car is paid off and I'll be looking to be able to rent a small place. I have decided not to continue making the monthly payments on the remaining four credit cards ($80k) since I'm critically low in my savings account. Should I close any of these credit card accounts, or leave some, or all, open? Regarding the four remaining credit cards ($80k), which following procedure will affect my credit rating less: Chapter 7, or, tolerating years of incessant creditor persecution?
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Bills.com
January 02, 2012
It sounds like your credit score has already been seriously damaged by being delinquent on your mortgage and your credit cards. The short sale will also adversely affect your ability to receive new credit. However, your problem does not seem to be your credit score. The biggest problem is the large amount of unsecured debt that you have accumulated. Your creditors will not just bother you, but they will take real action, which can lead to a court judgment and then wage garnishments, liens on your personal property and bank levies.

Debt settlement could be a viable alternative, but only if you can afford the monthly payment that the program requires. Bankruptcy may be the best alternative, especially if, in addition to the 80K in unsecured debt, you are left with a deficiency balance on the mortgage, post-short sale.

I recommend that you read the Bills.com article about debt relief and get a no-cost, no obligation analysis of your debt options from a pre-screened debt relief provider. Speak with a bankruptcy attorney, as well.
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Peggy S.
Hardy, KY  |  December 15, 2011
I really need the help. I have worked hard and expected to retire at the same job that I had started at 21, but in my 40's an unexpected injury has made it impossible for me to work. I have filed my disability, but I have no income and my family supports me. I have defaulted on my credit cards and there will a judgement against me in one as of this month, but I am broke and the only thing I have is a 10 year old car so that I can get to my Doctor appts. My question is can they take my car? I live in Kentucky. Thank You.
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Bills.com
December 16, 2011
See the Bills.com resource Collection Laws & Exemptions to see the exemptions for your state. You mentioned Kentucky. The vehicle exemption is $2,500, so if your vehicle is near or below that value, you need not worry about a judgment-creditor asking the sheriff to seize the vehicle and sell it at an auction. If the value of your vehicle is significantly higher in value than $2,500, then consult with a lawyer to learn what, if any, options you have to protect this asset.
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Moorpark, CA  |  November 25, 2011
I lost my job in May 2011. Consequently I had to quit making payments on my credit cards as the unemployment benefits are barely sufficient to pay my rent and utilities. The credit card companies keep calling and now a 3rd party collection agency has been calling. Should I declare bankruptcy? Can they garnish my CA unemployment checks?
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Bills.com
November 27, 2011
Your unemployment benefits are not subject to garnishment, due to credit card debt. However, if any creditor obtains a court judgment against you, monies in your bank account could be taken through a bank levy.

Before you decide on bankruptcy learn about options for debt relief. Start by reading Bills.com's valuable information about debt relief.
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Jaimie M.
Mancheter, NH  |  November 16, 2011
My husband just paid off a settlement to a lawyer for a credit card debt, however the lawyer has the debt from Arrow Financial, which bought the debt from someone else. No one knows who owned the original debt, and we can't find any information on the credit report. There is another settlement that he is supposed to pay, but they won't tell him who it is for. What should we do next? How do we figure out who our money went to?
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Bills.com
November 16, 2011
Validate the debt. A debt that cannot be validated may not be collected. The fact that the collection agent cannot tell you the source of the debt tells me it is unlikely it will be able to validate the debt.
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Dan J.
October 19, 2011
In your experience, what right, if any, do United States debt collectors have to pursue assets in other countries? For example, if I have 150k in credit card debt, and zero assets in the US...but well over 50k in cash assets in another country, can they sell the debt to a debt collector in that country, and possibly seize my cash assets there? Would you say there are any jurisdiction laws that govern such behavior?
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Bills.com
October 19, 2011
I have no experience with a collection account crossing international borders. My guess — note that deliberate word choice — is the non-US court would look at a US collection account with great curiosity, and may not recognize its legitimacy. What a non-US court would more likely understand is a judgment from a US court that the local court may domesticate in that country, assuming there are treaties between the US and the local country allowing judgment domestication. How does a consumer know if such treaties exist? Consult with a local lawyer who has international commerce experience. The other method is to use common sense. The US has close economic ties with its free-trade partners, for example, and virtually no ties with Cuba, North Korea, or Iran.
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Jayme K.
San Diego, CA  |  October 18, 2011
I have a few outstanding debts from early 2009 when I lost my job. I am working again and would like to remedy my debt and credit situation. The original creditors (Chase & HSBC) have charged off and sold the accounts to various junk debt buyers/collection agencies (Unifund, Main Street Acquisition, and Cavalry Portfolio). What are your recommendations on debt settlement? I have read a lot of feedback regarding contacting the original creditor, settling for a percentage with the original creditor or collection agency, requesting a credit report deletion upon settlement, etc. Thank you for your advice!
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Bills.com
October 18, 2011
See the Bills.com resource Negotiate Debt for tips and techniques in negotiating delinquent debt. The typical range for credit card debt settlement is 40 to 60 cents on the dollar. However, if the debt is particularly old, start negotiations at 15 cents on the dollar. One last thought: Negotiate a pay for delete.
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Lucy B.
Wilmington, DE  |  October 31, 2011
Please understand that the debt buyers have zero control over any negative trade line placed on your credit report by the original bank. If you pay the judgments on your debts the debt buyer will move to satisfy the judgment against you and they should send you a paid in full letter referencing the original creditor, the credit card number, the case caption and civil action numbers. Once the judgment is paid it will be YOUR responsibility to alert the 3 credit bureaus that the judgment is paid in full. You'll want to send a copy of the paid in full letter with the satisfaction piece filed at the court. When a civil action is filed or a judgment is entered against you, the credit reporting agencies pick up that information and add it to your report. They do not update their records once the judgment is paid. If you live in a state where their are wage attachment laws, bank attachment laws or liens on your real estate, don't expect the debt buyer to settle your judgment for anything less than 50%. Do not send in any money to anyone without first receiving a letter outlining the settlement. The debt buyer and/or their attorney should send you something with language like "upon receipt of $XYZ, we will satisfy the judgment against you and send you a letter stating the debt originally owed to ABC Bank is paid in full". Never send in money without getting the deal in writing. All reputable companies and attorney's adhere to this practice. Good luck.
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Jeff H.
Montville, CT  |  October 17, 2011
Hi I just recieved a letter from a collection agency for a Credit card debt from 17 years ago when I lived in South Carolina. As it is my understanding after 7 years the debt is considered a charge off. The credit card was for 300 - 500 dollars and the bill they are sending me is for 1582.28. My question is isnt the statute of limitations being held up or are they still able to collect the debt from 17 years ago?
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Bills.com
October 17, 2011
Your misunderstanding of the law and the meaning of an accounting term is leading you astray.
  • Charge-off / write-off. An accounting term that means a creditor has moved an account from its current-accounts book to its general ledger as a bad debt. It does not mean the account is canceled or forgiven. See the Bills.com resource Charge Off for a more complete discussion of this oft-misunderstood phrase.
  • Seven Years. This length of time is how long a derogatory item can appear on a consumer's credit report file. It has nothing to do with charge off. It also has nothing to do with a state's statute of limitations. See the Bills.com resource Fair Credit Reporting Act to learn more about what can appear on a credit report and when.
  • Statute of Limitations. Just because a statute of limitations has passed does not mean a creditor may not collect a debt, except in Wisconsin. The passing of a statute of limitations gives a defendant in a lawsuit an affirmative defense, and nothing more. See Statute of Limitations to learn more.

A collection agent working on an ancient debt may contact a consumer to attempt to collect an ancient debt (except in Wisconsin). It can even file a lawsuit against the consumer. However, as mentioned above, the consumer has an affirmative defense if there is such a lawsuit.

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Jackie B.
Twp Of Brick, NJ  |  October 17, 2011
I just received a letter in the mail that I owe a jewelery store 4,000 but can settle for 2200. I found my original receipt the total amount charged was 1400. Keep in mind it was purchased in Sept. 05. I know that the statute of limitations is 6 years from when the account went delinquent. How do I determine the date it went delinquent, since I have never made a payment.
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Bills.com
October 17, 2011
Typically, the statute of limitations clock for a debt either begins at the last payment, or when the payment was due. In this case, because you never made a payment, it is probably when the first payment was due.
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